Columbia Sportswear Raises 2018 Guidance On Earnings, Revenue Beat

Columbia Sportswear Co. on Thursday afternoon reported that net income for the third quarter ended September 30 increased 14 percent to $100.2 million, or $1.42 per diluted share, compared to third quarter 2017 net income of $87.7 million, or $1.25 per diluted share. The company’s earnings beat Wall Street estimates by 14 cents.

Third quarter 2018 non-GAAP net income third quarter 2018 net income increased 11 percent to $99.3 million, or $1.41 per diluted share, compared with non-GAAP third quarter 2017 net income of $89.8 million, or $1.28 per diluted share.

The company reported net sales increased 6 percent (7 percent constant-currency) to $795.8 million from net sales of $747.4 million for the third quarter of 2017, beating estimates by $5 million. Non-GAAP net sales of $788.9 million increased 6 percent.

President and CEO Tim Boyle commented, “As we celebrate our company’s 80th anniversary, I’m delighted to mark this milestone with the strongest quarterly and year-to-date results in our company’s history. While this reflects broad momentum across our brand portfolio and regions, it is exciting to see the Columbia brand U.S. business leading the way. Our robust direct-to-consumer performance, across both our brick & mortar and e-commerce channels, is a testament to brand strength and demonstrates that consumers are responding positively to our innovative product line. In wholesale, the positive momentum we experienced with our Spring 2018 assortment has continued with excellent early season sell-through of our Fall 2018 product line. With better-than-expected quarterly and record year-to-date results, we are pleased to increase our full year outlook.”

“These results and updated outlook demonstrate that our shift to become a more brand-led and consumer-focused organization is working. Our powerful balance sheet with $451 million in cash and short-term investments and no long-term debt provides the flexibility to invest in our growth initiatives as our major markets continue to evolve. It is from this position of strength and confidence that we are investing in our four strategic priorities to:

enhance consumer experience and digital capabilities in all our channels and geographies;

expand and improve global direct-to-consumer operations with supporting processes and systems and

invest in our people and optimize our organization across our portfolio of brands.”

“We have very strong momentum heading into the important holiday sales season and look forward to updating investors on fourth quarter results when we report next February.”

Through the first nine months of 2018, net income increased 38 percent to $155 million, or $2.19 per diluted share, compared to $112.2 million, or $1.59 per diluted share, for the same period in 2017. Year-to-date 2018 non-GAAP net income increased 40 percent to $165.1 million, or $2.34 per diluted share, compared to $117.7 million, or $1.67 per diluted share, for the same period in 2017.

Year-to-date, net sales grew $194.6 million, or 12 percent (10 percent constant-currency), to $1,884.7 million, compared to $1,690.1 million for the same period in 2017. Non-GAAP net sales through the first nine months of 2018 grew $172.0 million, or 10 percent (9 percent constant-currency), to $1,862.1 million, compared to $1,690.1 million for the same period in 2017.

Third Quarter 2018 Financial Results

(All comparisons are between third quarter of 2018 and third quarter of 2017 unless otherwise noted).

U.S. net sales increased 9 percent, attributable to low-20 percent growth in direct-to-consumer (“DTC”) and low-single-digit percent growth in wholesale. The company operated 135 U.S. retail stores at September 30, 2018 compared with 127 at the same time last year.

Third quarter 2018 operating income of $129.1 million, or 16.2 percent of net sales, increased 5 percent compared to operating income of $122.9 million, or 16.4 percent of net sales, in the third quarter of 2017. Non-GAAP third quarter 2018 operating income of $126.0 million, or 16.0 percent of net sales, was essentially flat compared to non-GAAP operating income of $126.2 million, or 16.9 percent of net sales, in the third quarter of 2017.

Third quarter 2018 net income increased to $100.2 million, or $1.42 per diluted share, a 14 percent increase compared to net income of $87.7 million, or $1.25 per diluted share, in the third quarter of 2017. Non-GAAP third quarter net income of $99.3 million, or $1.41 per diluted share, increased 11 percent compared to non-GAAP net income of $89.8 million, or $1.28 per diluted share, in the third quarter of 2017.

Taxes

Third quarter 2018 income tax expense was $30.0 million resulting in an effective income tax rate of 22.7 percent compared to an income tax expense of $32.7 million, or 26.4 percent, in the third quarter of 2017. The effective tax rate decreased compared to the prior year primarily due to the change in the U.S. federal tax rate for the current year.

Non-GAAP income tax expense was $27.8 million resulting in an effective income tax rate of 21.5 percent compared to a non-GAAP income tax expense of $33.9 million, or 26.7 percent, for the same period last year.

Balance Sheet

At September 30, 2018, cash and short-term investments totaled $451.5 million compared to $430.3 million at September 30, 2017. In addition to cash and short-term investments, the company had $14.0 million in restricted cash as of September 30, 2018 related to consideration placed in escrow as a portion of the funds needed to complete the buyout of the remaining 40 percent non-controlling interest in the company’s China joint venture in early 2019.

Consolidated inventories increased 10 percent to $617.2 million at September 30, 2018 compared to $558.6 million at September 30, 2017 including a $16.0 million decrease due to a balance sheet reclassification of the estimated cost of inventory associated with sales returns into prepaid and other current assets under the new revenue accounting standard. Excluding the impact of this classification change, consolidated inventories increased 13 percent compared to September 30, 2017.

Year-to-Date Cash Flow, Share Repurchases and Dividends

Net cash used in operating activities for the first nine months of 2018 was $98.1 million compared to $12.4 million used in the first nine months of 2017.

Capital expenditures totaled $45.2 million in the first nine months of 2018 compared to $41.8 million for the same period last year.

Through the nine months ended September 30, 2018, the company repurchased 1,260,186 shares of common stock for $107.2 million, or $85.08 per share, and paid $46.2 million in dividends to shareholders and $20.0 million in dividends to the non-controlling interest in the company’s China joint venture.

At September 30, 2018, approximately $230.7 million remained available under the current stock repurchase authorization which does not obligate the company to acquire any specific number of shares or to acquire shares over any specified period of time.

The board of directors authorized a 9 percent increase in the company’s regular quarterly cash dividend to $0.24 per share payable on November 29, 2018 to shareholders of record on November 15, 2018.

Updated Full Year 2018 Financial Outlook

All projections related to anticipated future results are forward-looking in nature and are subject to risks and uncertainties which may cause actual results to differ, perhaps materially. Projections are predicated on normal seasonal weather globally. In addition, the company’s updated full year 2018 financial outlook assumes that current macroeconomic and market conditions in key markets do not worsen.

The company’s annual net sales are weighted more heavily toward the Fall/Winter season, while operating expenses are more equally distributed throughout the year resulting in a highly seasonal profitability pattern weighted toward the second half of the year.

The company currently expects 2018 net sales growth of approximately 11.0 to 11.5 percent (prior 9.0 to 10.5 percent) compared with 2017 net sales of $2.47 billion. The company expects non-GAAP net sales growth of approximately 9.5 to 10.0 percent (prior 7.5 to 9.0 percent) which excludes approximately $40 million in net sales associated with the new revenue accounting standard.

The company expects full year 2018 gross margin to improve by up to 165 basis points (prior up to 140 basis points) and non-GAAP gross margin to improve by up to 90 basis points (prior up to 60 basis points), excluding approximately $40 million of benefit to gross profit associated with the new revenue accounting standard.

The company expects SG&A expenses to increase at a rate faster than net sales resulting in approximately 100 to 110 basis points of SG&A expense deleverage (prior 120 to 140 basis points) and non-GAAP SG&A expense deleverage of approximately 25 to 35 basis points (prior 20 to 40 basis points) excluding approximately $40 million in SG&A expenses associated with the new revenue accounting standard, approximately $16 million (prior $19 million) in Project CONNECT program expenses and discrete costs and a $4 million benefit from a recovery in connection with an insurance claim.

Based on the above assumptions, the company expects 2018 operating income between approximately $308 million and $312 million (prior between $286 million and $295 million) and non-GAAP operating income between approximately $319 million and $324 million (prior between $306 million and $315 million) resulting in operating margin between approximately 11.2 and 11.3 percent (prior between 10.6 and 10.8 percent) and non-GAAP operating margin between approximately 11.8 and 11.9 percent (prior between 11.5 and 11.7 percent).

The changes in revenue and expense classification associated with the new revenue accounting standard are expected to have an approximately 20 basis point negative effect on reported operating margin rate for 2018, but no effect on reported operating income.

The company expects an estimated full-year effective income tax rate of approximately 22 percent. The tax rate may be affected by further refinement of the company’s 2017 TCJA provisional estimates as well as changes in the company’s geographic mix of pre-tax income and other discrete events that may occur during the year.

The company expects 2018 net income between approximately $240 million and $244 million (prior between $223 million and $230 million), and non-GAAP net income between approximately $252 million and $255 million (prior between $239 million and $246 million) or diluted earnings per share between approximately $3.41 and $3.46 (prior between $3.15 and $3.25) and non-GAAP diluted earnings per share between $3.57 and $3.62 (prior between $3.37 and $3.47).

With respect to the company’s 2018 financial outlook, non-GAAP financial measures exclude net sales of approximately $40 million with an offsetting increase in SG&A expenses of approximately $40 million associated with the new revenue accounting standard as well as Project CONNECT program expenses and discrete costs of approximately $16 million, $12 million net of tax, or $0.17 per diluted share (prior $19 million, $15 million net of tax, or $0.21 per diluted share) and a $4 million, $3 million net of tax, or $0.04 per diluted share, benefit from a recovery in connection with an insurance claim. In the first nine months of 2018, the company incurred $2.7 million, or $0.04 per diluted share, in incremental provisional income tax expense related to the TCJA.

Preliminary 2019 Commentary

The company’s initial 2019 commentary assumes normal weather conditions, current foreign currency exchange rates and no significant changes to the current macro-economic, geopolitical or competitive environment. Additionally, this financial outlook assumes no additional tariffs beyond those that have been announced and are scheduled to be implemented. These and other factors present a material risk to results if conditions change.

In light of the company’s better-than-expected growth in 2018, the meaningful financial value capture related to Project CONNECT and ongoing decisions to significantly invest in the company’s strategic growth priorities, the company is providing limited commentary regarding current planning efforts for 2019.

The company is currently planning high-single-digit percent net sales growth for 2019 compared to the company’s expected 2018 reported GAAP net sales and

Based on favorable initial Fall 2018 sell-through, advance wholesale and distributor orders for the Spring 2019 season, early feedback from customers regarding the company’s Fall 2019 product line and plans for continued growth in the company’s global DTC businesses, the company currently believes it can achieve high-single-digit percent net sales growth in 2019 compared to expected 2018 GAAP net sales.

The company continues to expect meaningful financial value capture related to Project CONNECT in 2019. These financial benefits will be most evident in the company’s planned gross margin and will enable it to continue significantly investing in the business to support its strategic priorities.

It is also important to note that once the company concludes the buyout of the remaining 40 percent non-controlling interest in its China joint venture, which is expected to occur in early 2019, the company will no longer record a non-controlling interest share of net income. This non-controlling minority interest share of net income was $7.2 million in 2017 and $6.6 million in the first nine months of 2018.

The company will provide additional 2019 guidance detail when it announces financial results for the fourth quarter and full year 2018 currently scheduled for February 7, 2019.